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Online Extra: Ericsson: "Smaller, Yes, but Stronger"

August 03, 2003

Call it a case of excellent timing. Carl-Henric Svanberg, the new CEO of Swedish wireless equipment giant LM Ericsson (ERICY), has been in the job just under three months. Some skeptics wondered about his telecom credentials, given that the 51-year-old manager previously ran the world's largest lockmaker, Sweden's Assa Abloy. But on July 18, Svanberg got to report Ericsson's best quarter in three years. Though sales were down 28% year-over-year, to $3.37 billion, they rose 7% from the first quarter. More important, Ericsson reported positive cash flow and an operating profit.

Now, convinced that the worst of the telecom crisis is past, Ericsson is forecasting a return to net profit before yearend. The fresh start has provoked giddy response from investors: Since Svanberg came on board, they've driven up Ericsson's Stockholm-traded "B" shares by 76%, to 10.8 Swedish krona on July 24, and its New York-traded ADRs by 82%, closing at $13.06 on July 23. Andy Reinhardt, BusinessWeek's European technology correspondent, and London Bureau Chief Stanley Reed met with Svanberg on July 18 at Ericsson's headquarters in southeast Stockholm. Following are edited excerpts of their wide-ranging interview:

Q: What's your immediate objective -- growth or profits?

A: Every business always wants to see growth, and so do we. But we don't necessarily see growth as our only way to profit. Today's environment is good enough to make profit in. That's why we said, "let's make sure we have a company that is strong, that makes money, and that can take its leadership position in the world and drive the industry forward." That means becoming a more efficient company

Q: Why wasn't Ericsson able to make money as the No.1 seller of wireless gear?

A: This was a company that grew tremendously during the 1990s -- and then dropped also dramatically. We had to cut 65% of our cost structure. That made for a very turbulent period, for six or seven years. With all that happening, it was very unlikely to be a highly efficient company.

Now we know that the organization can be much clearer, responsibilities can be clearer, workflows can be straighter. We can just be a better, stronger company. And that is what we're doing. So, in parallel with the downsizing, we're working on operational excellence, to create a stronger -- smaller, yes -- but stronger and faster company.

Q: Do you think it has helped or hurt that you came from outside the telecom industry?

A: I'm not sure whether it was an advantage or not, because every success you have in business starts from an understanding of the particular business you're in. But I also believe that other perspectives help. Ericsson has been, for good reason, very technology-focused and has developed tremendous technologies over the years. But we have more to do to create excellent supply-chain management, clarity of organization, and so on. And there, it has helped to come from the outside.

Q: What's an example of how your outside perspective helped?

A: If you look at mobile infrastructure, there are core networks, which are large projects often unique to the customer, involving lots of system integration. That's a project-management business. But we also sell radio networks and base stations, and we make about as many per year as Volvo makes cars. For those, you need a workflow that's more like the auto industry.

When you try to do both in one organization -- the high-volume standard products and the low-volume custom projects -- it gets a bit too complex. So we are splitting those supply chains to create excellence in both. This is something that strikes you when you come in from the outside. Of course, for customers, at the end of the day, it's very important that it all works together.

Q: Are you comfortable with Ericsson's current financial situation?

A: Yes, it was one of the highlights of the second quarter. We had a 200 million krona ($24 million) loss before restructuring charges, so we're very close to getting back in black by the end of this year. We had a positive cash flow of 5 billion ($610 million), and that was a very strong number. I would say the whole financial situation is such that we can conclude the financial crisis is behind us. We can also conclude that we are well on the way to a strong profitable position.

My fundamental management philosophy is that if a company is selling at a certain level, you have to drive it to be profitable at that level. When you've been higher, it's easy to slip into a trap and say, "Well, we're not profitable now, but soon the market will be better again, and then everything will be fine." We're not counting on that. We're not betting on any improvement in the market. My view is: What's wrong with now? If we get profitable, then we can go at full strength.

Q: What's your assessment of the prospects for your market?

A: What we are going through makes it clear that there is always a price to pay when you get too optimistic. The whole world was too optimistic in the 1990s -- the info-tech bubble and all that -- and everybody involved in the IT and telecom business got too optimistic. On top of that, the European countries sold their 3G licenses, so suddenly here we were with a burst bubble and operators sitting on tremendous debts.

Now we've gone through years when operators reduced debt. They're getting closer to the point where things are becoming stable again. When the operators were under pressure, the financial markets were focused on cash flow, cash flow, cash flow. Then one day, people start asking, "Where's your future? What's your growth plan?" We are approaching that point now. Operators will start to invest.

Q: What will it take to stimulate operators to start spending on their networks?

A: 3G [third-generation broadband mobile networks]: 3G provides more than double the capacity at lower cost. So that's a no-brainer. Then we can speculate how fast various services start to develop on top of that. That will drive the infrastructure business.

There are over 1 billion mobile users today. One of our overall strategic objectives is to develop the subscriber base of the first billion. That's where 3G and added services come in. It's less about adding new customers than developing the ones you have. The next part is how to reach the next billion subscribers, in China, India, rural areas, where it's more a matter of cost-efficient voice. They're two different worlds.

Q: Given everything that has happened in the last few years, how's morale at Ericsson?

A: I must say that I'm amazed at how strong the overall spirit of optimism is at the company. I thought that I would find more broken souls, considering the situation, but I think the loyalty within the company is amazing. And I think also the passion for the telecom industry is great.

But when you cut back 65% of the cost structure, of course there are frustrations. But everything that we are driving, all these fundamental issues, are very welcomed by the company. Everybody wants it. So, it's a gratifying job.

Q: Your predecessor Kurt Hellstr? made a big push to get Ericsson more into services -- consulting, outsourcing, etc. Are you aiming for the same thing?

A: Absolutely. That is the way forward for us, but it doesn't take away any focus on the infrastructure side. It's not that we're turning away from one thing toward something else. Professional services are simply a very interesting business to develop. We also have plans and hopes around the infrastructure side as well.

Our opportunities aren't just reflected in our market share today, but also in our installed base. Being the oldest player in the infrastructure business, we have a bigger installed base than anyone else, and we are also quite experienced at dealing with infrastructure from other vendors. So our strategic position to develop the business is quite good.

Q: How would you describe yourself as a manager?

A: What is Ericsson? It's 47,000 people coming to work every morning with the ambition to do a good job. My job is to get energy out of those 47,000 people. If we have a common goal, a common strategic direction, we can move mountains. Of course, if we move in different directions, we get nowhere. So, that's the first part.

Within that, it's important to actually agree on the overall strategic direction. I've always put a lot of emphasis on making sure to get everybody on board and motivating everybody to work in the same direction. That's important because when you work with a lot of people, your own contribution every day is important, but even more so is to energize everybody's contribution.

Q: You sound more like the manager of a mature business than a growth business. Are you more pragmatic that your predecessors?

A: It's important to understand what a business is. If you look at telecom over a long period of time, it has always had good growth. We will not return to 20%, 30%, 40% growth. But we will have good growth going forward, once we get out of the crisis. It is important that we build a fundamentally sound business, because that is how we can respond and drive business going forward. If that is mature management, so be it.